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Q&A: How Can I Earn More Interest With Low Risk?

The trade-off for more safety is usually less return.

Question: I earn about $70,000 a year, and my wife makes $60,000. Both of us have stable jobs. Our living expenses are about $3,000 a month. We have about $15,000 in bank savings. I’d like to move the savings to where we could get more interest, but at the same time we know we need the security and liquidity. Can you recommend something that would accomplish both? And what is your recommendation as to how much money we should keep in cash reserves?

Ric: Well, it’s difficult to have your cake and eat it too. You’re correct that you need to put money aside in a rainy-day fund. And you’re also correct that the money needs to be safe and liquid — meaning available on a moment’s notice — because you never know when you might need it.

Sorry to say, but the price you pay for safety and liquidity is expressed in the form of a low interest rate. Bank accounts are paying little because there’s a correlation between risk and return: the higher the risk, the higher the potential return; the lower the risk, the lower the potential return.

If you say to a vendor, “I absolutely, positively want my money safe, and I absolutely, positively want my money available on a moment’s notice,” then they’re going to say, “Fine. But we’re not going to pay you much interest in exchange for those features.” So that’s why you’re not earning much from your bank account.

We recommend that people keep enough in their rainy-day savings to cover three to 24 months of their normal expenses. That’s a broad range because everyone’s situation is different. It depends on many factors, including income, expenses, job security and job satisfaction.

If both of you have safe, secure jobs, six months’ worth of expenses would probably be sufficient. So $15,000 to $20,000 in cash reserves sounds about right for you.

If you were the sole breadwinner, with an income based on sales commissions that fluctuate one month to the next, or if your company seemed shaky and likely to go out of business, I would tell you to have 24 months of savings on hand. Those are the kinds of questions we ask to help us determine the right emergency fund goal for our clients.

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